Over the course of May, the Pound weakened further against many of its rivals. As the focus remains on the easing of the lockdown restrictions the question has shifted to how governments around the world will be able to restart stalled economies – and the UK is no different. A best-case scenario would be a v-shaped recovery, although fears of a second wave of coronavirus hitting later in the year remains a concern. Sterling’s sensitivity to global trade has made it susceptible to the ongoing broad-based weakness in the world economy.
The Pound has also had to contend with a record drop in UK GDP growth. The British economy shrank at its fastest rate in March, showing a 5.8 percent contraction compared to the previous month. Widespread economic disruption has ensued across all sectors since the coronavirus lockdown took effect, with household consumption also reporting a drop of 1.7 percent in the first quarter, damaging sentiment in the Pound.
The US Dollar generally strengthened during the first half of May as investors fretted about the risk to other assets due to the Covid-19 lockdowns, but then fell back again over the second half of the month to end up weaker overall.
This Dollar trend wasn’t apparent when compared with the British Pound, with the latter generally weakening in May, causing GBP/USD to fall from $1.25 to $1.24 over the month.
Traders think the Dollar is likely to remain strong over the coming month as a number of geopolitical factors combine to keep investors seeking safe havens.
One factor other than Covid-19 that has been exerting an influence of the value of the Pound last month was the EU. Markets had feared that Brexit talks could end up being inconclusive, as the EU appeared unwilling to budge on the key issues of fishing rights and judicial jurisdiction. However, rumours that this was not the case fuelled speculation that a timely deal would be reached before 2021, lending the Pound some support towards the end of the month.
Nevertheless, the Pound fell steadily against the Euro, beginning the month at €1.13 and ending it at €1.11.
With around 8.4 million workers in the UK currently on furlough from work, the chancellor Rishi Sunak has said the Government will continue to pay wage bills only until the end of October. In the meantime, employers will have to pay NI and pension contributions from August and an increasing proportion of employee pay from September. While there are fears that this may cause a spike in unemployment as firms cut back on workers, the added stability to the economy as a whole has provided a level of support for the Pound.
While the price of a barrel of oil ended up below $20 at the end of April, May saw prices rebound to over $35, which had a marked effect on the Pound to Canadian Dollar exchange rate. As a result, GBP/CAD fell throughout May, from CA$1.73 to around CA$1.70.
The Pound continued to weaken against the Australian Dollar in May as investors began to feel more confident about investing in AUD. This saw GBP/AUD fall from AU$1.94 at the start of the month to AU$1.84 by the end.
The main driver for this substantial fall was approval over the way the Reserve Bank of Australia had handled the emergency measures laid out in response to the Covid-19 crisis, as well as data indicating the initial virus fears had turned out to be overblown.
The recovery in AUD has been welcomed by Australian Dollar investors, after the currency had crashed to 18-year lows in March.
Prices in the Eurozone dropped for the fourth month in a row in May meaning inflation is now almost at zero. With inflation being one of the key targets for the European Central Bank, there are now concerns that if the trading bloc slips into a deflationary crisis the Bank will have to take drastic measures, such as cutting interest rates even further. Ordinarily this would panic currency traders, but the info was overshadowed by the Covid-19 related news and the Euro didn’t suffer much as a result.
Currency markets are continuing to assess the damage done by the virtual shutdown of entire economies, with areas suffering greater economic hits likely to continue to see their currencies weaken.
Despite lockdowns being eased, many questions still remain about the extent to how quickly economic activity can be brought online again, with a number of other contributing risk factors – such as the civil strife in the United States – likely to keep the US Dollar relatively strong at the expense of other currencies over the coming month.
However, the key driver for the Pound is likely to continue to be focus on what concessions (if any) the EU will make to avoid a ‘no deal’ Brexit scenario at the end of the year.
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